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The Tail that Wags the Economy: Beliefs and Persistent Stagnation

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  • Julian Kozlowski
  • Laura Veldkamp
  • Venky Venkateswaran

Abstract

The Great Recession was a deep downturn with long-lasting effects on credit, employment and output. While narratives about its causes abound, the persistence of GDP below pre-crisis trends remains puzzling. We propose a simple persistence mechanism that can be quantfied and combined with existing models. Our key premise is that agents don't know the true distribution of shocks, but use data to estimate it non-parametrically. Then, transitory events, especially extreme ones, generate persistent changes in beliefs and macro outcomes. Embedding this mechanism in a neoclassical model, we find that it endogenously generates persistent drops in economic activity after tail events.

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  • Julian Kozlowski & Laura Veldkamp & Venky Venkateswaran, 2015. "The Tail that Wags the Economy: Beliefs and Persistent Stagnation," NBER Working Papers 21719, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:21719
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    References listed on IDEAS

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Central Banks and Systematic Risks
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      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2016-10-03 17:58:45
    3. Financial Crisis: The Endgame
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2018-09-03 12:25:40

    Citations

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    Cited by:

    1. Nicholas Bloom & Fatih Guvenen & Sergio Salgado, 2016. "Skewed Business Cycles," 2016 Meeting Papers 1621, Society for Economic Dynamics.
    2. Edouard Schaal & Mathieu Taschereau-Dumouchel, 2020. "Herding Cycles," Working Papers 1166, Barcelona Graduate School of Economics.
    3. Straub, Ludwig & Ulbricht, Robert, 2015. "Endogenous Uncertainty and Credit Crunches," TSE Working Papers 15-604, Toulouse School of Economics (TSE), revised Dec 2017.
    4. Jean-Pierre Danthine, 2017. "Taux négatifs: made for Switzerland," PSE Working Papers halshs-01571650, HAL.
    5. Matthew Gibson & Jamie T. Mullins & Alison Hill, 2019. "Climate Risk and Beliefs: Evidence from New York Floodplains," Department of Economics Working Papers 2019-02, Department of Economics, Williams College.
    6. Ortega, Francesc & Taṣpınar, Süleyman, 2018. "Rising sea levels and sinking property values: Hurricane Sandy and New York’s housing market," Journal of Urban Economics, Elsevier, vol. 106(C), pages 81-100.
    7. Martin Guzman & Joseph E. Stiglitz, 2016. "Pseudo-wealth and Consumption Fluctuations," NBER Working Papers 22838, National Bureau of Economic Research, Inc.
    8. Jesus Fernandez-Villaverde & Lee Ohanian, 2018. "The Lack of European Productivity Growth: Causes and Lessons for the U.S," PIER Working Paper Archive 18-024, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 07 Sep 2018.
    9. Kenneth Rogoff, 2017. "Dealing with Monetary Paralysis at the Zero Bound," Journal of Economic Perspectives, American Economic Association, vol. 31(3), pages 47-66, Summer.

    More about this item

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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